The Story Behind the Numbers

It wasn't exactly an Oscar-worthy performance, but the reviews for the February employment report were generally positive. To be sure, the critics had low expectations, which always reduces the bar for a passing grade. And for beleaguered workers still suffering through the worst job market since the Great Depression, there wasn't much to cheer about in the February figures. The unemployment rate remained stubbornly high at 9.7 percent, the economy continued to shed jobs - bringing the total losses since the start of the recession in December 2007 to 8.43 million - and about 4 in 10 unemployed persons (6.1 million) have been out of work for more than 27 weeks. The sorry state of the job market continues to be a headline-grabbing lightning rod that will undoubtedly dominate the political landscape leading up to the midterm elections.

That said, the markets had been braced for an uglier reading on the employment situation, fearing that the snowstorms battering the East Coast during the first two weeks of February would have resulted in larger job losses than the 35 thousand reported for the month. The general consensus was for a decline in nonfarm payrolls of between 50 and 150 thousand. Moreover, the unemployment rate was expected to edge higher, from 9.7 percent to 9.8 percent. Not surprisingly, investors heaved a sigh of relief when the results came in, sending stock prices sharply higher on Friday. What's more, revisions to prior months revealed less weakness in the job market than originally estimated, as a net 35 thousand workers were added to payrolls in December and January.

Simply put, economists have every reason to cling to a script that has been unfolding for the past six months or so, namely that conditions are getting "less bad by the month". That's hardly an uplifting appraisal of an economy that remains firmly in the grips of a "jobless recovery". Assuming that the Great Recession ended last June or July, a widespread perception supported by an array of economic indicators, it has now been at least six months into a recovery that has yet to generate positive job growth. That's bad, but hardly lives up to the jobless recovery following the last recession in 2001, when the economy continued to shed jobs for nearly two years following the trough. Unless we are heading for a dreaded "double-dip" recession, it is unlikely that such a prolonged episode of job losses will be repeated this time.

Indeed, there is every reason to believe that the job market would have turned positive in February if not for the impact of the snowstorms. True, the Labor Department acknowledged in its report that it couldn't precisely estimate the weather-related impact on payrolls, although it did note that: "severe winter weather in parts of the country may have affected payroll employment and hours." We agree, and believe that the effect was more than trivial. Admittedly, the snowstorms may have actually boosted hiring in certain instances, such as for clean-up crews and for workers engaged in repairing downed telephone wires and the like. But that was clearly overwhelmed by the depressing influence inclement weather had on the job market last month.

One imperfect measure of the negative effect can be gleaned by the number of households who claimed they did not show up for work because of bad weather conditions. In February, that number surged to 1.1 million workers, the highest for any month since January 1996 and the most ever for the month of February. Even more telling was the swing from January, when 300 thousand workers stayed home because of bad weather. The 817 thousand jump from January to February was the largest for any month on record. This measure of the weather effect is imperfect because many companies still report workers as employed even if they only receive a paycheck for one hour of work That may explain the sizeable 0.4 percent decline in the average workweek at factories during the month.

Still, given the huge jump in the number of people staying away from their jobs because of bad weather, we suspect that payrolls could have been depressed by around 100 thousand workers last month. At the very least, had normal weather conditions prevailed, the economy would have generated positive job growth, ending the need to describe the nascent upturn as a jobless recovery. We believe that designation will be dropped next month, when the March report is released. Not only will the economy recoup the weather-related losses from February (assuming the return of more seasonal weather), the numbers will also receive a major assist from government hiring of temporary census workers, which should add about 300 thousand to the payroll count.

No doubt, the expected surge in March employment will be greeted with a fair amount of skepticism, as analysts will cite the unwinding of the weather-related distortions and the temporary boost from census hiring. Hence, it will be necessary to string together several months of positive news on jobs as well as the broader economy before households and businesses are firmly convinced that the recovery is hear to stay. Clearly, there are still many doubts about its staying power. The housing sector is still being weighed down by mounting foreclosures and restrictive credit conditions, and many industry analysts expect another relapse after the formidable government props are removed. The Fed is scheduled to end its mortgage-purchase program at the end of this month, and the homebuyers' tax credit is set to expire at the end of April. If the housing market has any hope of surviving the withdrawal of government aid, the job market has to strengthen and provide potential homebuyers with the confidence, not to mention the income wherewithal, to support a rebound in activity.

Even if job creation finally turns positive on a sustainable basis next month, it would be a mistake to expect much of a decline in the unemployment rate this year. For one, it takes at least 100 thousand jobs a month just to keep up with the increase in the labor force. For another, growth in the labor force will accelerate considerably as soon as the job market starts to improve. Keep in mind that nearly a million workers dropped out of the labor force over the past year because they were too discouraged of ever finding a job. These dropouts can be expected to flood back in at the first sign of improving job prospects. Hence, it would not be surprising if the unemployment rate moves higher even as hiring picks up. That is a time-honored cyclical dynamic that often accompanies the early stage of an improving job market.

But a move towards the previous post-war peak of 10.8 percent reached during the early 1980s, which seemed possible a few months ago, now seems unlikely unless the economy sputters or, more ominously, dissolves into a double-dip recession. There are more than a handful of pessimists who still assign a high probability to such a setback, citing primarily Washington's inability to deal with key legislative issues, such as health care, and pernicious budget deficits as far as the eye can see. We agree that uncertainty is the enemy of growth, particularly as it relates to the reluctance of small businesses to take on new workers until they have a firmer sense of the health costs involved. However, we also believe that the economy has enough momentum to withstand the headwinds generated by the turbulent political landscape.

Forget the robust 5.9 percent inventory-driven growth in GDP in the fourth quarter, which gives the impression a V-shaped recovery is underway. That growth spurt will not be sustained in the current quarter, as most of the inventory restocking has been accomplished, and companies will calibrate their new orders with current demand conditions. But demand is holding up surprisingly well in the face of a still-moribund labor market and household balance sheets that remain heavily laden with debt and devastated by the steep decline in housing and stock values during the recession. That resilience of consumers shows up in the latest personal income and expenditure report released this week. In January, personal consumption increased by a hearty 0.5 percent, up from 0.3 percent the previous month, with most of the gain driven by volume instead of price increases. Real outlays rose by a solid 0.3 percent during the month, with spending on big-ticket durable goods leading the way, leaving the January level of spending 2.1 percent above the fourth quarter average.

While that broad spending measure is more than a month old, more recent data indicate that consumers continued to spend at a respectable pace in February. Retailers reported strong same-store sales for the month, and auto sales came in stronger than expected. Piecing together these fragments over the first two months, it now seems that consumer spending is on track to grow by a 2 ½ percent annual rate in the current quarter, up from a 1.7 percent gain in the fourth quarter. So, while the inventory boost to GDP will no doubt be smaller, the consumer sector, which accounts for 70 percent of the total, will be larger. If business investment in equipment and software continues to increase, as expected, and the revival in exports stays intact, the economy could turn in a solid performance during the fourth quarter, defying the double-dip prognosticators.

It is not entirely clear what is underpinning the surprising strength in consumer spending this year. Households were expected to put aside a sharply higher fraction of incomes to compensate for the wealth destruction during the recession that decimated retirement nest eggs for millions of ageing baby boomers. But while the savings rate has increased since reaching a low of under 1 percent in early 2008, it has not returned to the 8 - 10 percent range that typically prevailed at the onset of most postwar recoveries. After reaching a high of 6.4 percent last May, the savings rate has hovered just over 4 percent since, dipping unexpectedly to 3.3 percent in January. The January slide should be reversed in coming months, but it appears that consumers may feel comfortable with a savings rate no higher than 6 percent or so during the balance sheet rebuilding process. One reason: the astonishing gain in the stock prices since last March has restored more than $5 trillion of value to household portfolios. What's more, an extraordinary volume of debt has been extinguished over the past year, lowering household debt burdens. Hence, it may well be that households are closer to being satisfied with their financial condition than many pessimists expected. If that's the case, the urgency to boost savings has lessened, which means that the consumer propensity to spend out of incomes will be higher than otherwise. Of course, that propensity will not mean much if the job-creating engine fails to crank up and generate more paychecks in coming months. The January jobs report was a promising omen, but that promise has yet to be fulfilled. Stay tuned.